Demand for housing in London has pushed prices up so far that it is having a detrimental impact on the rest of the economy. Lenders, meanwhile, report an increase in very long terms on mortgages as borrowers attempt to bring their mortgage costs within affordable monthly limits.
Soaring house prices in the capital are preventing activity in the economy because so little monthly income is left for spending after mortgages or rent, the Guardian reported this month. At 46% more now than its peak before the credit crunch, the cost of property in London has rocketed far beyond inflation and wages. It is estimated that 11,000 jobs could have been created had that money been spent in retail or other places in the economy.
The severe shortage of property is a significant factor in the in the price boom and despite politicians’ best intentions, new home developments have little chance of accelerating in the near future.
It follows that we can expect a change in the dynamic of London residents as retail and service workers are forced away and many professionals need to share rent until much later in life.
This increase on wage pressure coincides with rapid growth of long-term mortgage terms for new loans. Over just the last five years, home movers arranging mortgages with terms longer than 30 years has doubled (Council of Mortgage Lenders). Many lenders now offer mortgages for 35 or 40 year terms making very large loans more affordable on a monthly basis. Buyers are expecting to work until they are much older and are making the significant decision to take on a lifetime debt to get on the property ladder.
Of the many lenders offering long-term loans currently, a typical example is Nationwide, who lend up to 90% of the property value on a 2 year fixed rate at 2.79% reverting to 3.99% for a £999 reservation fee, or 3.54% for 5 years. They will lend to age 75.
Yet whilst these very long term loans may remobilise the market, the interest is life-changing. Over a 25 year term, the interest alone on a £300,000 repayment loan at an average 4.5% is £220,249 however, amortized over 40 years, that same mortgage attracts the interest cost of £347,370, which more than doubles the original loan amount.
Furthermore, the problem of combating high prices with long-term mortgages is self-perpetuating: by creating the affordability, the sky-high house prices are sustained by the availability of buyers. Until there is enough property, or fewer people demanding it, there is no reason the upward rampage of prices will slow.
Most vitally, clients considering a mortgage for a large loan need to carry out a thorough appraisal of the impact of committing to another 40 years of working at their current pace. To discuss choices or obtain figures for interest costs over different terms, please call me on 0844 879 4522 or email firstname.lastname@example.org. Rates can be withdrawn at any time but are right at the time of publication.
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